$2.5b forex backlog threatens financial markets

By Collins NwezeThe Central Bank of Nigeria (CBN) is expected to gradually clear over $2.5 billion forex demand backlog as it continues the sales of $100 million per week to small and medium enterprises (SMEs).There is an estimated $2.5 billion backlog of unmet dollar demand, report by EFG Hermes, an investment and research firm has shown.It said local investors are not tempted, despite high equity premium and downside risks to naira to make invest in the stock market. Local investors should be piling into Nigerian stocks: risk-free rates have fallen sharply since access to Central Bank of Nigerias Open Market Operations was barred last October, valuations are at post-global financial crisis lows, and downside risks to naira continue to build (stocks should be a natural hedge), it said.The naira on Friday weakened marginally against the dollar at both the parallel market in Lagos and the investors window.The naira currency traded around N472.5 to the dollar at the parallel market, down by 0.5 points from N472 exchanged on Thursday.The Pound Sterling and the Euro closed at N582 and N530.The Naira closed at N389.50 to the dollar at the investors window, down by 1.50 points from N388 it traded on Thursday.The EFG Hermes says foreigners have cut back on net selling because of the forex backlog of $2 billion to $2.5 billion for portfolio investors), but was surprised that so little local liquidity is going into stocks.Financial system distortions are partly to blame (interest rates do not make much sense ), but we note that valuations have not been a good guide to future returns in Nigeria. We remain underweight on Nigeria. We have no visibility on when we will see changes in economic policy that are necessary for a rally in stocks. Guaranty Trust Bank is our preferred Nigeria name , it said.Market turnover at the investors window stood at $12.61 million.It, however, closed at N381 to the dollar at the official CBN window.Dollar demand has been swelling and piling up pressure on the naira. Importers with past due obligations have been scrambling for hard currency while providers of foreign exchange such as offshore investors have exited.But the Manufacturers Association of Nigeria (MAN), which says its members cannot access dollars as the impact of the coronavirus pandemic and fall in oil prices have cut the flow of foreign currency.It was pretty difficult to source forex from all the available windows, the group said.MAN said its members have had problems accessing foreign currencies for five weeks in part due to lack of CBNs interventions, the manufacturers group said.The lack of access to foreign exchange by local manufacturers is hampering their ability to import vital raw materials, machines and spares that are not available locally, the group said. The Central Bank needs to prioritise improved access to foreign exchange for operators in the real sector to enable them acquire input that are not available in the country.
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